Fitch may reduce rating of Kazakhoil and raise - KazTransOil

/REUTERS, New York, Feb 22, 02/ - International rating agency itch informed on Friday about a possibility of a reduce of rating of Senior Unsecured Debt of Kazakhstan oil company Kazakhoil and raise of rating estimation of similar category of borrowings of pipeline company KazTransOil. Currently rating of Senior Unsecured Debt of Kazakhoil and KazTransOil companies was stated by the agency at the level of "BB" and "BB-", respectively. Motivation for Fitch decision was recent decree of the President of Kazakhstan Nursultan Nazarbaev on a merge of Kazakhoil and a holding Oil and Gas Transportation, which includes KazTransOil. "Proposed combination meaning a joining of potential stability of revenues ... of KazTransOil with profitability of oil extrusive transactions of Kazkhoil really promises some moderately favorable perspectives for rating estimations of both companies," is noted in a press release of Fitch. "At the same time, form and essence of new organization leaves a lot of issues uncovered some of which may influence badly Kazakhoil ratings". Last Wednesday President Nazarbaev by his decree founded Kazmunaigas Company, which includes national oil company Kazakhoil and two transportation monopolies KazTransOil and KazTransGas unified into holding Oil and Gas Transportation. Structure consolidating assets for the amount of several billion dollars was called to become one of the main players in fast developing energy market of Kazakhstan, that extracted last year about 40 million tons of oil and plans to treble the production by the year 2015. Following is original text of Fitch report: Fitch Ratings has today placed the 'BB' Senior Unsecured Debt rating of NNK Kazakhoil (including the EUR125 million guaranteed notes issued by Kazakhoil Finance BV) on Rating Watch Negative. Simultaneously the 'BB-' (BB minus) Senior Unsecured Debt rating of NTOC KazTransOil (applied also to the USD150m guaranteed notes issued by KazTransOil Finance BV) is placed on Rating Watch Positive. The Short-term rating of KazTransOil is affirmed at 'B'. This action follows the announced decree by the President of Kazakhstan to merge Kazakhoil and KazTransNeftegaz, the parent company of KazTransOil. The companies expect the formal combination procedure to take up to two months to complete. While the timing of the decree shows some government insensitivity relative to Kazakhoil's recent debut bond issue, the existing ratings already incorporate a tolerance band for the peculiarities of the Kazakh corporate environment. Importantly, the ownership status within the group of the three material subsidiaries - which have formed the core of Fitch analysis of Kazakhoil - has not been questioned. Nonetheless, the combination is a reversal of a government decision in 1999, which itself reversed KazTransOil out of Kazakhoil ownership, only a few months after KazTransOil had been injected into the oil concern. Put options relating to change of control in both companies' bonds relate to continuing 50% ownership (direct or indirect) by the Kazakh state, and are thus unaffected by the plan. A new put option is being considered for the Kazakhoil bonds, which would grant investors the right to put the bond to Kazakhoil in the event of the downgrade related specifically to this merger. The proposed combination does offer some mildly positive perspectives for the ratings of both Kazakhoil and KazTransOil, principally arising from the potential stability of revenues from KazTransoil's regulated pipeline business being combined with the lucrative upstream business of Kazakhoil. Fitch has, however, performed no due diligence on the other entities to be incorporated into the group, which, while unlikely to be of material size when compared with either Kazakhoil or KazTransOil, are equally unlikely to have stand- alone credit profiles higher than that of Kazakhoil. Additionally, the possibility of a common stress period (i.e. low prices) affecting both entities remains material, and the likely benefits would at best solidify the rating of the group and constituent companies at the 'BB' level, which could involve an upgrade of the current unenhanced ratings of KazTransOil. In the meantime, a substantial number of questions remain to be answered on the form and substance of the new entity, some of which could exercise negative influence on the current, State support enhanced ratings of Kazakhoil. The Rating Watch will be resolved following analysis of further details on the exact corporate structure, including cross-guarantees, structural subordination issues and any possible ring-fencing of assets; the pro forma credit profile of the other entities being incorporated into the new group with Kazakhoil and KazTransOil; and the confirmation or cessation of existing government support undertakings. Based on current information, Fitch does not believe that the ratings of Kazakhoil would be downgraded by more than one notch in the event of a downgrade.